Fixed income’s slow adaptation to payment for research

While MiFID II’s unbundling rules across the board are in full swing, fixed income is still getting used to the accompanying cultural and logistical changes. Payment for research in equities has been part of the cultural understanding of commission-based trading – even when not practically used – however, research payment in FICC is a more foreign concept.

Vicky Sanders, co-founder at RSRCHXchange, a marketplace for institutional research, says, “Research hasn’t been paid for historically and there hasn’t been the same sort of cultural understanding, as in equities, that there was a cost for research – most often paid for by clients.”

A recent report from Liquidnet’s head of Market Structure and Strategy, Rebecca Healey, looking into the practical impacts of MiFID II, revealed that even by the end of 2017 most firms (66%) had still not finalised their budgets for research.

Healey says that there is still confusion over what information constitutes research, and firms have reported a lack of clarity over what the relevant price should be. With some research offered for free, the report highlighted the difficulties in determining fair prices.

“This not only makes it challenging for the buy side to establish what a fair price should be, but many on the buy side are concerned about how the regulator will view this in terms of inducements,” she says.

A European Securities and Markets Authority (ESMA) Q&A in April 2017 stated that some FICC research could be deemed “minor non-material benefit,” and could be given away for free, if it was publicly available and widely distributed.

National Competency Authorities (NCAs) such as France’s Autorité des marchés financiers (AMF) and the UK’s Financial Conduct Authority (FCA) have released guidance on ESMA’s Q&A, with the FCA noting that research on FICC “Is also not carved out… unless research providers choose to make it available to the public free of charge.”

The AMF, following its release of guidelines in January, responded to an enquiry from The DESK, stating that some generic FICC material lacks substantive analysis and thus is not considered as research.

“It no longer constitutes a particular advantage to the recipient and is therefore no longer likely to generate a conflict of interest,” said a spokesperson.

Separating trading and portfolio management (PM) reduces the risk of execution being influenced by broker research activity. However, the Liquidnet research found 13% of firms still allow PMs to direct order flow.

The report suggested one method of managing this potential conflict of interest would be to “ensure that trades with any portfolio manager involvement are flagged and monitored.”

Where some buy-side firms develop centralised dealing desk and bar PMs from trading, others report trying to acknowledge the insights PMs can provide, “but it cannot dictate the execution outcome.”

Just as the adaptation to research in equities took quite a few years to become fully realised, so will fixed income; however, Healey suggests that this could bring about higher quality research as firms are more selective and strategic with their research budgets.

“We might see a move towards new types of research,” she says. “The whole consumption of research is changed; people are much more keen to absorb data sets rather than traditional broker-sourced research.”

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